AN energy crisis is gripping SA and Engie coporate affairs boss Jim Kouts is at the epicentre. Mr Kouts, also HomeStart Finance’s chairman and a director of several other businesses, had lunch with Paul Starick.

The AdvertiserApril 21, 201710:00am

Jay Weatherill on SA's $500million power plan0:25

Jay Weatherill details how the market power and the lack of competition causes energy prices to be so high in South Australia and not a lack of resources. Courtesy: Sky

March 14th 2017

a year ago

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PAUL STARICK: What’s your view about how we’ve got to the situation where we’re worried about blackouts and energy security? How do we overcome it to a stage where power goes back to being boring, low-priced and reliable?

JIM KOUTS: That February (blackout) incident (when temporary load shedding was ordered for 90,000 customers due to insufficient power supply) required a direction from the market operator.

The (Pelican Point) plant needed to be directed on because it could not be made available and bidded into the market without us damaging our commercial position.

We don’t resile from the fact that we’re in the energy business to return a profit. It doesn’t matter whether you’re in government ownership or private ownership you have to wash your face.

The key message for South Australians is that the return of Pelican Point being available to the market at full capacity (479MW) ticks the reliability box. It’s a really important point because up until now it’s been on only half the load.

I think no one really disagrees that you need your thermal plants available. Pelican couldn’t come on because it’s competing against energy that’s essentially been made available to the market at a cheaper and subsidised price. That’s the disadvantage a gas-fired power station has against renewable energy. Gas was always seen as the transition fuel but, in a sense, renewables leapfrogged against it. That’s great except when, as we all know, the wind doesn’t blow and the sun doesn’t shine.

My message on the issue of affordability is if you want to decarbonise an economy, it will cost more for all your energy. You can’t sugar-coat that point. You have to be honest with the community. The cost will be significant, as you can see. Energy prices have more than doubled in recent years. South Australia has always paid more for its energy because it’s not had the coal reserves of the eastern states. South Australia has never had cheaper energy, no matter who owns the power stations.

Coal is clearly a cheaper fuel. What subsequently happened is that coal has come out and South Australia is now basically a gas and renewables mix. It costs more.

Then you add the fact that gas prices have gone up for a whole lot of reasons. It’s all flowing into the market.

Did you have to close Hazelwood (power station, in Victoria) to make Pelican Point profitable – and why is that not gaming the system?

It’s certainly not gaming the system because the two decisions are actually independent of each other. Remember they’re in different jurisdictions so they’ve got to wash their face economically whatever happens. The Hazelwood power station is 51 years old, it’s got much higher fixed costs.

Do we invest $400 million of capital and can we get a return on that over the next 10 to 15 or so years? The decision was made by the boards that that’s not an economically feasible decision.

The work on returning Pelican has been going for a long time. I was part of the decision-making process that removed Pelican from the market. If you’ve lost $17 million in 2015 and it’s your business, why would you keep running it?

One of the key reasons Pelican was removed from the market was the lower cost of renewable energy. Have we got too much renewable energy in SA and what are the consequences?

I think renewables have come into the market much quicker than we expected. My view is that, like all markets, they tend to overshoot. The not unforeseen consequence of that it has meant larger thermal plants can’t compete. Keeping it really simple – a plant like Pelican is built to run, over a year, 70 to 80 per cent of the time. With the impact of renewables, what happened was Pelican was running about 30 per cent and, hence, was not able to get a return.

Jim Kouts believes SA has a jewel in the crown at Outer Harbor’s Pelican Point.Source:Supplied

Now that you’ve decided to return Pelican Point to full capacity, is there potential for further expansion?

SA has got a jewel in the crown at Pelican Point. It’s got the capacity to expand. What South Australians don’t appreciate is there is another 300MW that could be added. It’s got the development approval for that.

I’m not saying we’re about to do that. But these are really important decisions for the future of South Australia’s energy system, because in the foreseeable future you will need reliable thermal plants.

Under what circumstances would you activate that?

It’s always prudent to have approvals in place. If you feel the market working an opportunity and you want to put the capital in, then you can, you’re ready to go. The fact that I’m saying that shows you that our company has made prudent decisions. The plant was developed in 1999-2000 and it was seen to become one of the key energy suppliers in the state — all built by private capital I hasten to add. So, are the conditions ready now? No.

But what I’m saying to the community is we’ve got capacity to expand Pelican Point and decisions that allow it to grow, I think are good for the state of South Australia.

Under what circumstance would you trigger that development approval?

It’s the market. The construct of the market sends signals to investors. The problem we have at the moment is the investment is sporadic.

So even though you’ve got high prices, and I do appreciate the community is suffering from those high prices, normally those high prices should be sending signals for investment. That’s not happening yet because of the uncertainty of the policy mix.

So how far off is the adding of that 300MW to the South Australian grid?

I think if there was policy certainty and, depending on what our competitors do, there’s a great opportunity to develop what I call the Pelican Point Energy Park. It’s a good facility, it’s been built by private capital, it’s quite new. As the market settles, I think that’s when people will look if there is an opportunity to invest more money in the power industry. It’s not there yet.

What’s your view on ETSA’s privatisation? Do you think the State Government’s intervention is a good thing or unnecessary?

I don’t see these things in the good or bad territory. I see them as an allocation of capital. If you’ve got all the national electricity market primarily privately owned, what it does is free up the government balance sheet to spend it on hospitals, football stadiums, key transport infrastructure, education and other such important investments.

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Given Test cricket is my one true sporting love – together with a passion for soul/funk music and comedy – my guests would be ... Aussie cricket legendRichie Benaud; Rolling Stones frontmanSir Mick Jagger, right; US singerWilson Pickett; Queen of SoulAretha Franklin; and US comedian Jerry Seinfeld.